2012 (6) TMI 256 - HC - Income Tax

Capital vs revenue expenditure - nature of the expenditure on account of advertising and marketing incurred by the assessee in different assessment years. The AO was of the view that the expenditure which was incurred on neon signs and glow signs was capital in nature as these signs are semi- permanent fixtures fixed at numerous retail outlets of the assessee and providing enduring benefit. Therefore, out of the total expenditure incurred on advertising and publicity, expenditure which was specifically attributed to the glow signs and neon signs (it was major component of advertising and marketing expenditure) was disallowed as the revenue expenditure Held that - In the case of Assam Bengal Cement Co. Ltd. (1954 (11) TMI 2 (SC)) , if the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business, it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it is made not for bringing into existence an asset or advantage but for running the business or working it with a view to produce the profits it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. glow signs boards have a short life, they decay with the effect of weather, and require frequent replacement. These observations may not be entirely correct having regard to the literature qua neo sign board produced by the learned counsel for the Revenue. However, this fact would not alter the ultimate decision as it is still obvious that no asset of permanent nature is brought into existence. by putting the neon signs and glow signs, no asset of permanent nature is created. Simply because self-life of such neon signs is more, may not be of any significance once we keep in mind the important aspect on which the expenditure is incurred i.e. on advertising and marketing. no question of law arises and these appeals are accordingly dismissed

Issues Involved:
1. Nature of expenditure on advertising and marketing (specifically on neon signs and glow signs).
2. Applicability of Section 37(1) of the Income Tax Act.
3. Distinction between capital and revenue expenditure.
4. Consistency in the treatment of similar expenditures in previous assessment years.
5. Technological advancements affecting the nature of neon signs and glow signs.

Detailed Analysis:

1. Nature of Expenditure on Advertising and Marketing:
The primary issue in these appeals pertains to whether the expenditure incurred by the assessee on neon signs and glow signs should be treated as capital or revenue expenditure. The Assessing Officer (AO) considered these expenditures as capital in nature, citing their semi-permanent fixture status and enduring benefit, thus allowing depreciation instead of full deduction. The CIT (A) reversed this decision, treating the expenditure as recurring business expenditure under Section 37(1) of the Act. The Tribunal initially supported the AO's view but later recalled its order, affirming the CIT (A)'s stance, emphasizing the recurring nature of such expenditures essential for business operations.

2. Applicability of Section 37(1) of the Income Tax Act:
The CIT (A) and the Tribunal, in their final decision, held that the expenditure on neon signs and glow signs qualifies for deduction under Section 37(1) of the Act. This section allows deductions for any expenditure laid out or expended wholly and exclusively for business purposes, provided it is not capital or personal in nature. The Tribunal noted that the expenditure had a direct nexus with the business operations and was essential for advertising and marketing, thus fulfilling the criteria under Section 37(1).

3. Distinction Between Capital and Revenue Expenditure:
The Tribunal initially treated the expenditure as capital, citing the long life and enduring nature of neon and glow signs. However, upon reassessment, it acknowledged that while maintenance costs could be revenue in nature, the installation costs were significant for business promotion and thus should be treated as revenue expenditure. The judgment referenced the Supreme Court's decision in Empire Jute (supra), which clarified that not all enduring benefits are capital in nature; the nature of the advantage in a commercial sense is crucial. If the expenditure facilitates business operations without creating a fixed capital asset, it should be treated as revenue expenditure.

4. Consistency in the Treatment of Similar Expenditures in Previous Assessment Years:
The Tribunal noted that similar expenditures were allowed as revenue expenditures in previous assessment years (1996-97 and 1997-98) by the AO himself. In the assessment year 1998-99, although the AO disallowed the expenditure, the CIT (A) allowed it, and the Department did not challenge this decision. This historical consistency supported the Tribunal's final decision to treat the expenditure as revenue in nature.

5. Technological Advancements Affecting the Nature of Neon Signs and Glow Signs:
The Revenue argued that advancements in technology have extended the lifespan of neon signs, making them more akin to capital assets. However, the Tribunal found this argument unpersuasive, noting that the AO did not distinguish between glow signs and neon signs. Additionally, there was no statistical data to segregate the expenditures for each type. The Tribunal emphasized that the primary purpose of the expenditure was advertising and marketing, which is inherently a revenue activity, irrespective of the technological advancements.

Conclusion:
The Tribunal concluded that the expenditure on neon signs and glow signs should be treated as revenue expenditure, allowable under Section 37(1) of the Income Tax Act. The appeals were dismissed, affirming that no question of law arises from the Revenue's arguments. The judgment highlighted the importance of the nature of the expenditure in a commercial sense, the consistency in the treatment of similar expenditures in previous years, and the primary purpose of the expenditure in business operations.

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